In Private Letter Ruling 201432032 (PDF), the IRS denies late IRA rollover relief. The taxpayer wanted to invest IRA funds into a limited partnership (LP) and the taxpayer’s IRA custodian would not go along with it. This should have been the first red flag for the taxpayer but he went right past this warning. Instead he asked his financial advisor, also a CPA, how he could accomplish his goal. His financial advisor told taxpayer to title the LP investment in the IRA’s name and the taxpayer did so.
In 2012, over 2 years after the investment, the financial advisor realized titling the LP investment in the IRA’s name did not work because the investment was not held by a qualified custodian. The taxpayer requested that IRS waive the 60 day rollover requirement as he had relied upon professional advice but IRS said that excuse did not meet the requirements of Revenue Procedure 2003-16. The IRS stated that the taxpayer “chose to use the proceeds from IRA B to fund a business venture rather than attempt to roll the proceeds over into an IRA account for retirement purposes.”
What can we learn from this PLR? First, a financial advisor, even a CPA, can have his or her opinion influenced by the commission or fees earned from the investment. Perhaps this was a case of a subconscious influence but it still could have influenced the outcome. Second, reliance on professional advice is not always a cure for bad tax outcomes. Third, if one advisor (the original IRA custodian) will not go along with the deal, the taxpayer should proceed with extreme caution. Finally, we can learn that investing in a business through an IRA is a tricky thing. The penalties and taxes can be quite significant if all the “I’s” are not dotted and all the “T’s” are not crossed.